Paul Ferraresi

By Paul Ferraresi

When purchasing a maximum funded, minimum death benefit (MFMDB) Equity Indexed Universal Life (EIUL) policy there are many factors that must be considered.

The professional that advises you on one of these special policies is thinking in the opposite pattern of a traditional insurance agent. You, and most insurance agents, have been programmed to spend the least amount in premiums to buy the maximum amount of insurance death benefits. That is a correct strategy if you are buying death benefits.

The objective of an EIUL policy that is MFMDB is to provide LIVING BENEFITS! The policy is established so you purchase the minimum amount of death benefits that the law allows while providing the maximum living benefits for you. When correctly structured these programs, using equity management, can provide a tax deductible non qualified retirement plan whereby you cannot outlive the income.

Some benefits to you:

• The contributions can be tax deductible
• Contributions grow income tax free (not tax deferred like IRAs/401ks)
• The money can be withdrawn income tax free
• When you die the benefits blossom and transfer to your heirs income tax free

Some other side benefits:

• The money in the account can be withdrawn for college needs. These amounts are NOTsubject to Financial Aid scrutiny. In fact, the value in these accounts are NOT considered for Financial Aid calculation when families apply to a college
• Account values and withdrawals are exempt from Medicaid calculations
• Monies can be withdrawn for nursing home or in-home care use and are exempt from Medicaid rules

How do these policies function?

There are strict government guidelines that determine the amount of minimum insurance that must be purchased for the monies being invested. (bucket size) These rules are covered in the tax laws “TEFRA” and “DEFRA”. The insurance amount required is based on many factors including age and gender. With the “bucket size” in hand, along with the minimum insurance amount, the next step is to determine how the program is funded.

These plans were so lucrative for policy holders, in the past, that banks and mutual funds lobbied Congress to shut them down because huge amounts of monies were flowing out of banks and mutual funds into EIUL policies. A shut down would be in violation of the anti-trust laws. Consequently, a compromise evolved in the tax law, namely, “TAMRA” that dictated how many years it will take to fund the “bucket”. The average time to fund is about 5 years. The dollars invested are placed in a liquid side fund (see Doug Andrew’s books Missed Fortune, Missed Fortune 101, and The Last Chance Millionaire for a detailed explanation).

The best illustration of how this program works is to envision owning a 5 story apartment building. Each floor symbolizes one year of the policy premiums.

When you rent out the first floor the income is not covering the entire building’s costs. This is true for the second and third floor. In fact, at the 3rd floor (3rd year of policy contributions) you are probably just breaking even. Once the 4th and 5th floors (4th and 5th year of policy contributions) are rented, then, you are seeing a positive cash flow. The annual gains now are retroactive back to the first day of ownership.

How are your premium payments distributed? Upon receipt of your premiums the insurance company will position your funds as follows:

1. Policy administration fee: Companies will charge $10-$20 per month. These fees are subtracted at the beginning of the year and held in escrow and then deducted monthly.

2. Premium load: These fees are for marketing, investment management, and other charges. The average cost is about 5.5% of premiums. These amounts are deducted only at the time of a premium payment.

3. Cost of Insurance (COI): The company determines the mortality costs, deducts this annual amount up front each year, holds it in escrow, and, withdraws it on a monthly basis. This amount varies based on your age, gender and amount of minimum death benefit.

Regressing, your gross premium dollars are received by the company. The fees and costs listed above are deducted leaving a net amount to invest. These net amounts are held in a low-yielding guaranteed income earning account until “swept” into your investment choices.

Companies have different “sweep days”. Some companies will place your monies on the 15th and 30th of each month. Other companies have a quarterly sweep date, say, the 15th of February, May, August, and November. If you miss the quarterly sweep by one day, then, your monies will sit in an interest earning account for the remainder of the quarter until swept in. The same concept holds for a monthly or biweekly sweep.

With these factors in mind let’s look at the first year of your program:

The policy is issued, say, on May 20th. You complete the policy delivery receipt papers and make payments on June 10th. If your company does a sweep monthly on, say, the 15th then your monies will make the June 15th deadline, otherwise, you wait until the next sweep date. If your crediting strategy is a 1 year point to point, then, your return will not show on the following year May 20th anniversary report since monies were invested June 15th for 1 year. In fact, the report will look grim on May 20th, in that, it shows the premiums paid, all the expenses explained in number 1-3 above deducted, and, no returns since your return crediting does not show up until the following June 15th. We suggest, and schedule, an annual review only after the return is credited.

In years 2-5 or 6, your premiums are paid. The monthly administration fee stays constant (it is fixed) at say $10-$20 per month for the life of the program. The premium load is deducted only for the years of your contribution. The cost of insurance will be charged for each year the program policy is in force.

To better understand the three major policy expenses let us use the rental building analogy.

1. The monthly policy fee is like paying the building’s monthly utility bill. This will continue for the time a property (or your policy) is owned.
2. The premium load would equate to paying the real estate broker’s leasing fee. The majority of these fees will be while we are “leasing up the property” (making our premium payments).
3. The cost of insurance, equates to the building management fee, in that, it will continue for as long as we own the property (or your policy).

Naturally fees and costs vary by company. In the first 3-4 years of the policy, the goal is to reach breakeven (similar to the leasing up of the building). In years 5 and 6, and thereafter the policy (the building) starts to cash flow.

Goals are things you may want to do or have. Purpose is using your money to fulfill your core values. It is our job, here at Founders Group, Inc., to help our clients align those values with their decisions about money. Achieving this balance will greatly enhance your likelihood of experiencing happiness and peace of mind. As Olivia Mellon, Ph. D., author and psychologist says, “If your relationship with money is not in balance, no amount of money will help you. It is our job (as financial planners) to help our clients find balance around money”.

I have asked all of my clients what their goals are, get a response like, “I want to accumulate $3 million by the time I am 60 years old.” Of course, this may be a goal, but it certainly isn’t a purpose. What is the underlying value behind that statement? It could be several things. Perhaps $3 million represents security, or freedom, or power, or peace of mind. When I get a response like that, I probe much deeper to discover what it is the client really wants.

If I were to ask this hypothetical client who wants to accumulate $3 million how he would want to be remembered, it is doubtful that he would say “as a person who accumulated $3 million.” Understanding the core value that is driving the goal will help me to better provide you with better advice.

When was the last time you read an obituary that said, “Frank will be remember most for his large home, his Mercedes and his bank account.” By asking clients how they want to be remembered will facilitate a discussion about their core values. From there you can live those values by aligning your decisions about money with those values.

While we all know that money is a means to an end, it seems that we need reminding from time to time. An article written on the Web site www.MoneyInstructor.com tells us the following story about a financial advisor who was working with an 85-year-old man to finalize his estate plan:

“The man had built what began as a small estate up to the sizeable sum of $8 million. Unfortunately, the man had also recently lost his wife of 40 years. It was during the discussion of how the money was to be dispersed that the man had the sudden realization that the money he has spent his entire life stockpiling would never be used for his or his wife’s enjoyment or benefit and therefore it was essentially worthless. The old model does not work because the old model gets the fundamentals wrong. Understanding the purpose of money is the starting point to offering good money management advice and to making good money management decisions.”

In order to understand a client’s values and help them identify a purpose for their money, I need to ask the appropriate questions. For every goal or desire expressed by our clients, we ask whether it represents a core value for them. Or is it just something they would like to do, or something they feel obligated to do. One example is asking them how they feel about philanthropy. Perhaps they classify that as a core value, but they have made no provisions in their estate plans for charitable giving. Instead, they feel an obligation to leave all of their money to their children. Of course, giving money to charity may be a goal, but shouldn’t we probe further to determine what the underlying value is? If that value is “making a difference” and they understand that, philanthropy would be one way to live in alignment with that value, and they may decide to use some of their assets to help fund causes that are important to them.

Peter Vadia, Ph. D., co-founder of SpiritHealth, wrote, “ When one comes from one’s core values, one’s inner sense of what is important in life and living … is at the heart of a life well lived, at work, at home and at play … and is at the heart of creativity, self management, self-responsibility, healthy behavior (mental, physical, emotional, spiritual, social, financial). Money, in this sense, has a different emotional and psychological energy around it, a softer energy, not unlike the energy reflected in one who says, “I love my work and I can’t believe I get paid for doing this.”

Our firm’s mission is a simple one: “To improve the quality of our client’s lives.” Helping them to find a purpose for their money is a key to fulfilling that mission.

I hope this article has helped in your understanding of “you”. As always let me know your thoughts.

We have just been notified by Doug Andrew’s team at Paramount Financial Services in Utah, that Paul Ferraresi has been appointed as a Missed Fortune Associate (MFA).

MFA is a select group of elite advisors trained and certified under Doug Andrew’s Missed Fortune Program. There have been about 4,000 people trained and certified as TEAM memebers by Doug to present True Wealth Transformation Seminars, draft Missed Fortune Plans and Implement the strategies.

MFA is comprised of TEAM members that have taken extensive advanced training, passed a rigorous exam, and, had their Missed Fortune cases reviewed and graded for efficiency and maximum client benefits. There are less than 200 TEAM members that have been awarded this special recognition.

I want to share this proud annoucement with you. I know we at Founders Group, Inc. will continue “to strive to be the best to make you better”.

Congratulations to Paul Ferraresi!!!

Sincerely,

Christopher J. Morgan

The subprime mortgage market is in chaos, home prices are dropping, many mortgage companies have shut down and some banks are teetering at the edge of bankruptcy. No, the sky is not falling.

These cyclical actions in the world economy have happened many times before. For most people the 1930’s depression, bank failures and a 30% unemployment rate (after the depression) is something you read about. Yet, you have lived through your own chaos with the dot.com (actually dot bomb) meltdown and the tech wreck bubbles of the late 1990’s. Real estate and stock markets go through classic meltdowns every 25 years.

Those that have foresight, strong stomachs and are contrarians make their wealth by buying near the bottom (Hmmm… seems I heard that before… buy low, sell high).

The Missed Fortune Principles of Wealth Building have been written about many times in this blog. I suggest you review these articles found in the Missed Fortune subheading.

Are the ideas of building your wealth by properly using equity management still valid? Can you still profit by “being your own banker”? Answer… yes, yes and yes again. Who better to learn about banking than the Federal Reserve. I encourage you to read this short excerpt of “The Feds” recent white paper abstract report.
Federal Reserve Abstract Report, Dated March 2007:

Many households face the trade-off between paying an extra dollar off the remaining mortgage on their house and saving that extra dollar in tax-deferred accounts (TDAs) used for retirement. We show that, under certain conditions, it becomes a tax arbitrage to reduce mortgage prepayments and to increase TDA contributions because of the tax- deductibility of mortgage interest and tax-exemption of qualified retirement savings. Using data from the Survey of Consumer Finances, we document that a significant number of households that are accelerating their mortgage payments instead of saving in a TDA forgo a profitable tax arbitrage opportunity. Finally, we show empirically that this inefficient behavior is unlikely to be driven by liquidity or other financial constraints. Rather, the observed behavior can be attributed to a certain extent to the reluctance of many households to participate in financial markets as either lenders or borrowers.

So what am I saying? … Stick with the Discipline of professional investing, or, suffer the Regret later in life.

I am asked by blog readers and clients why I do not automatically include Social Security (SS) disability benefits in my calculations should one become disabled. I feel it can be misleading to allow anyone to anticipate the SS disability benefit when the requirements for receiving the benefit are over whelming. There are a number of hurdles that must be met to receive SS benefits. An applicant must meet ALL of the following requirements.

1. Be fully insured by: (1) accumulating 40 quarters of coverage or (2) accumulating at least six quarters of coverage providing that he has acquired at least as many quarters of coverage as there are years elapsing after 1950 (or, if later, after the year in which he reaches 21) and before the year in which he becomes disabled.
2. Work under Social Security for at least five of the 20 years just before becoming disabled, or if disability begins before age 31 but after age 23, for at least one-half of the quarters after reaching age 21 and before becoming disabled (but not less than six).
3. Be unable to engage in “any substantial gainful work that exists in the national economy”, whether or not such work exists in the area, a specific vacancy exists, or the applicant would be hired if he applied for the work (however consideration is given to age, education, and work experience).
4. Such inability results from “a medically determinable physical or mental impairment” which is expected to result in death, or which has lasted (or can be expected to last) for a continuous period of not less than 12 months. A special definition of the term “disability” is provided for individuals age 55 or over who are blind.
5. Under 65 years of age.
6. Have filed an application.
7. Have furnished required proof of disability.
8. Have fulfilled a five-month waiting period.
9. Accept state vocational rehabilitation services or have good cause for refusal.

Do you fully understand what is needed to qualify? It is complicated and tricky. Most people retort … “Oh, I will never be disabled”. Hmmm! You have an eight times greater chance of becoming disabled than dying before age 65, yet, you purchase privately a life insurance policy but not disability insurance. Disability is known as “living death”. Income drops and you cannot function fully. Remember, disability does not mean a wheel chair! Carpal tunnel syndrome is one of the largest causes of disability.

But, Paul, I have disability coverage at work. Have you sat down and read the details of the policy. Go back to the 9 point “simplified” information on the Social Security definition and requirements to receive benefit above. How does your company policy’s definition of disability compare with the SS definition. Most companies do have their definition of disability the same or very close to the SS definition. As you reread the 9 point summary you may ask … “then who does qualify?” A perfect example that would, and did qualify, was the late Christopher Reeves. (I so admired his courage and fight). Reeves disability did fit the definition of disability for SS and most other company group policies. Speaking of your company group policy … all of them are basically the same. The majority will pay for your benefits for only one (1) year. No, Paul, my print out says to age 65. Wrong! Read the policy! It will cover your “own” job for one year. After one year if you can do ANY job then you are NOT considered disable and not receive benefits. See definition #3 in SS 9 point summary as to what determines “Any”. So, if your company policy stops after 12 months since you no longer qualify, then, why do you think SS will kick it? It won’t!

Some other points of your company policy … You will receive a maximum of 66% of your base compensation up to a certain maximum each month. If you cannot presently get by on 100% of your income how will you get by on 66%?? If you say you can, then, I double dog dare you to try it for six months. Go ahead, save 33% drop in income each month … it will improve your financial well being. Let’s add another piece to the puzzle. If your company pays the disability premiums for you, then, when you receive benefits they are taxable. Let’s see by using an example. If you are earning 72,000 per year (6000 per month) and become disable. You would receive benefits of 3600 per month less about 1200 in taxes to give you a spendable monthly income of 2400 per month. (Do you own present income calculations to see the bad news).

I suggest, no am telling you to get some help from a professional financial advisor (we are always ready to help) in this complicated area. I always suggest for everyone to purchase a private disability policy for your own occupation that augments your company plan. Do not wait under the “horse” leaves the barn – to invest in this coverage. If you wait until after you are disabled and apply for coverage the insurance company will say “FAT CHANCE”.

Let me try to emphasize the probability of you becoming disabled versus dying before age 65 with a simple story. You are going hiking in Forest A eight times over the next month. On one of your eight trips you will be bitten by a rattlesnake. (This represents the chance of you dying). Next you are going to hike into Forest B 8 times over the next months. On each of the eight trips you will be bitten by a rattlesnake. This represents the probability of you being disabled versus dying before age 65.

Ah … discipline or regret.